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Vocera Communications (NYSE:VCRA)

Q1 2014 Earnings Conference Call

May 1, 2014 05:00 PM ET

Executives

Brent D. Lang - President and CEO

William Zerella - CFO

Jay M. Spitzen - General Counsel and Corporate Secretary

Analysts

Ryan Daniels - William Blair & Company

Mohan Naidu - Stephens Inc.

Gavin Weiss - JPMorgan

David Larsen - Leerink Swann

Sean Wieland - Piper Jaffray

Jamie Stockton - Wells Fargo

Gene Mannheimer - B. Riley & Co.

Dillon Hoover - Craig-Hallum Capital Group

Eric Coldwell - Robert W. Baird & Co.

Operator

Good afternoon ladies and gentlemen and welcome to the First Quarter 2014 Vocera Communications Results Conference Call. My name is Whitney and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I’d now like to turn the presentation over to your host for today Mr. Jay Spitzen, General Counsel. Please proceed.

Jay M. Spitzen

Good afternoon. Vocera distributed a press release detailing quarterly results earlier this afternoon. It is posted on our website at www.vocera.com and also available from normal news sources. This conference call is being Webcast live on the Investor Relations page of our Web site where a replay will be archived.

On this call, we will refer to both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. This conference call will contain forward-looking information, including statements regarding Vocera’s projected operating results and anticipated market opportunities. These forward-looking information is subject to risks and uncertainties described in Vocera’s filings with the Securities and Exchange Commission and actual results or events may differ materially.

Let me now introduce our President and Chief Executive Officer, Brent Lang. Brent?

Brent D. Lang

Thank you, Jay. Good afternoon, everyone and happy May Day. Q1 was a pivotal quarter for Vocera. Not only did we exceed the top end of our guidance range for both revenue and earnings per share in a challenging market, we also completed a number of watershed events that have been in the works over the last year and that we believe will pay dividends in the future.

First, we introduced several new products in the quarter, including the Vocera Collaboration Suite and an expanded set of offerings in our Vocera Care Experience Solutions. These new products are generating strong interest and should act as a great source of future growth. In addition, with the mVisum acquisition, we added new core technologies to enable our alarm management and analytics and physician consult communication as part of our product set.

Second, we completed the successful launch of our new brand during Q1. All of Vocera’s products are now unified under a common brand that effectively conveys our broader promise to customers to deliver integrated, intelligent communication solutions that empower people to be more productive and deliver better patient care and customer satisfaction.

Third, we’ve increased our focus on execution. Not just in sales, but throughout the entire Company. Our sales enabled initiative is focused on training and empowering our sales force with increased focus and improved tools. Our marketing efforts are starting to generate leads that we expect will eventually help us drive future growth.

Finally, the opening of our development offices in Bangalore, India represents the opportunity for us to scale our R&D efforts in a cost-effective and timely manner, positioning us to accelerate the rate of new product introduction.

In spite of this great progress achieved inside the Company, we experienced a continuation of challenging hospital spending conditions as U.S hospital decision makers waited to see where a patient population and healthcare reform changes would end up.

As others in our industry experienced, hospitals began 2014 with a cautious operating and spending approach. As a result, while revenue topped our guidance, bookings did not meet our expectations in Q1. Conversely, booking so far in Q2 have gotten off to a much better start, up substantially from the prior year. We are hopeful that this represents a trend towards more positive spending environments as patient trend began to build confidence with providers.

For example, as noted in a recent hospital patient volume survey, patient population trends turned more positive throughout the first quarter and some hospitals expect additional volume growth this year from expanded patient populations. In addition, competition between providers trying to attract new members should create opportunities for Vocera Solutions to help differentiate their offerings. It remain to be seen whether Vocera will benefit this year from reconfigured IT spending, and project priorities stemming from the late March ICD-10 delay.

Recent data on smartphone trends provides new strong evidence supporting Vocera’s strategy. A recent [ph] [SPIVA] study provides compelling data, that consumer grade devices are having significant challenges in the hospital environment. In addition, it noted that caregivers are in need of tools that can determine others availability and status.

97% of the hospitals reported that there are nurses lack appropriate tools to determine care team member availability and status. The study also noted that 89% do not allow nurses to use their personnel smarphone, but 67% reported that they do so anyway. We see these kind of studies with strong evidence of the tremendous demand yet to be tapped in the market.

And Vocera software platform powered by the Vocera G, gives us the unique ability to seamlessly integrate a wide variety of devices and users across a full span of communications need, both inside and outside the hospital. We believe Vocera’s (technical difficulty) position is only getting stronger and our unique ability to solve the most critical care communication challenges is increasing the advantage we have over other solutions. With the addition of our Collaboration Suite smartphone app, Vocera can now cover a broader range of healthcare communication needs.

Shifting to sales and marketing, I am proud of the job our team did in Q1 to introduce, educate, and empower the field to sell the new Collaboration Suite and Care Experience products. On our investor call in February, I highlighted the recent expansion of our sales operations team, which has made good progress providing the necessary tools to help our customers navigate through approval processes more quickly.

Simultaneously, we’re expanding our sales training and account plan and capabilities. We are enhancing our forecasting methodology and are working with the sales team to improve knowledge and demo skills on the new products. Finally, it's worth noting that the tenure of our sales team continues to grow with 53 out of 64 quarter carrying headcount having been on their job at least 12 months as of the end of the quarter.

Meanwhile the marketing team continues to expand our lead generation program and it’s built a revenue performance management process to accelerate the sales cycle. Our CMO Bridget Duffy and our CNO Rhonda Collins continue to drive a fair thought leadership in the market. Together they participated in more than 20 industry events during the quarter, engaging with customers and other industry thought leaders to provide visibility for Vocera, so that we can better understand what our customers need and the problems they are working to solve.

As I turn to our pillars of growth, let me remind you that my comments in this section is always are focused on bookings. Let me begin with new hospitals. As its typical for Vocera in Q1, new hospital growth was slow in the quarter. Nonetheless we had some very good new hospital custom highlights including the 378 bed St. Francis Healthcare Center in Kansas City and a new high-end ambulatory facility affiliated with University of Wisconsin. Ambulatory centers like these represent an expanding growth opportunity.

Late in the quarter, we were very happy to receive the final fifth 140-2 certification for the B3000 badge. The timing allows prospective VA and DOD customers to include B3000 badges in their future procurement requests. We do not expect a sudden surgeon demand, but we do expect new orders will immediately transition to include the B3000 badge.

Speaking of the DOD, I want to share some data from a benchmarking test, that’s been done by the U.S army facilities. While we’re still securing permission to share the details, I can share with you that this army facility has documented substantial ROI savings, estimating annualized real dollar returns to nearly $2 million as well as substantial time savings and improvements in staff satisfaction.

Most importantly, they reported a 12-month payback which we believe will help drive other DOD department opportunities and we’re likely be relevant on the commercial side as well. We will share more of the details with you in the future, once we’ve their final approval.

Our second pillar, expansion within our install base continued a 2013 moderated pace in the first quarter. Tighter Q1 budgets resulted in expansion bookings below last year. However, notable expansions in the first quarter included the Mayo Clinic, [ph] [Reading] Hospital, North Shore-Long Island Jewish and Ohio Health.

The Mayo expansion added two new facilities in the Southwest region of Minnesota, putting us in all six of their sites. Many of these are small critical assess facilities, in which we’re deployed widely throughout the facility including installations in the ICU, EDU, OR, OB and med-surg units. [Ph] [Reading] Hospital, a multi facility health system Northwest of Philadelphia and a benchmark Vocera customer and the Vocera Solution to a new facility roll out that included doctors, nurses and administrators.

In addition, we earned a significant expansion order in Q1, for a new emergency department with North Shore-Long Island Jewish Health System. Finally, we believe upgrading customers to the B3000 badge remains a large opportunity and we continue to make progress on this front, including a recent large upgrade at a Columbia St. Mary’s which is part of the ascension health system.

Our third growth pillar is developing and acquiring new products to sell into our install base of customers. We launched two new products into the sales force in Q1, the Vocera Collaboration fleet and the Vocera Care Experience fleet. At the HIMSS Conference in late February we demonstrated (technical difficulty) in over 30 scheduled customer presentations and meetings as well as dozens of ad hoc demos and discussions.

The response from both current and prospective customers was very positive and the opportunity pipeline is growing, including 120 new leads out of HIMSS alone. The new alarm management solution which we added to our portfolio was part of our Q1 acquisition of mVisum expected to be rolled out to our sales force this summer. It generated significant interest to HIMSS and we’re excited to launch it into the market.

Integration is going well and we believe this strategic acquisition differentiates our offerings and we will provide further value to our customers. Finally, in the area of new product development, let me highlight the recent announcements of the opening of our development center in Bangalore, India, in order to expand and diversify our product development capabilities globally.

In addition to being very cost effective, the center expands our global view point and availability of product development talent. Longer term, we think Bangalore can become center for support and services around the globe, which brings me to our fourth growth driver international expansion.

International business had a strong performance in the first quarter, growing almost 25% year-over-year. Asia Pacific, Europe, and Canada all performed well and we saw significant deals for new customers and expansions in Australia, Canada and the U.K. Our momentum in Asia Pacific seems to be growing and the headwinds in Canada and U.K. maybe subsiding. Overall, international represented 15% of our revenues in Q1, the highest that we’ve seen in recent quarters.

Our final pillar is focused on growth in non-health care markets. Our mobility business unit generated four new contracts in the quarter, as you may have seen from the announcement of the Park and Strand Hotels; we continue to strengthen our position as a differentiating solution for the hospitality industry. Many of our hospitality customers are the number one or number two properties in their respective markets. In addition, we have ongoing dialogues with some of the larger chain and now have higher test programs launched with two of these chains.

We didn't see any nuclear deals in the quarter, but this remains a strong segment for us and I had every reason to expect continued progress there this year. In fact, one customer is doing a case study, during their maintenance period which will document several ROI truth points that can be shared with the industry.

Before I pass the call over to Bill, let me summarize by saying that despite some significant market headwinds in Q1, we’re off to a good start in Q2 and I’m very pleased with the progress we’ve made with regard to our products, our brand, and our sales enablement. We believe that each of these should enable us to return to higher growth rates in the future.

Now let me turn the call over to Bill for the financial highlights and guidance. Bill?

William Zerella

Thank you, Brent, and good afternoon, everyone. Starting with top line growth and the income statement. First quarter revenue was up 10% year-over-year to $24.7 million, the largest quarterly year-on-year growth we’ve seen since 2012. We benefited from the record backlog and deferred revenue exiting 2013.

Product revenue was up 9% year-over-year to $14.2 million with device revenue up 3% and software revenue up 31%. Badge shipments were up 5% overall, but B3000s were up 31% and comprised 97% of total badge shipments in the quarter. With the recent FIPS certification of the B3000 we expect this kind of bias to continue and B2000s will be limited to modest replacement levels.

The increase in software revenue was mainly a result of an increase in sales of voice communication software licenses, primarily attributable to increased sales for existing customers for both existing facility expansions and new facility deployments. Average initial deal size which can vary from quarter-to-quarter based on contract sites and the product sites was down slightly from a year ago. And badge ASP was effectively even with the year-ago quarter.

Services revenue was 11% higher year-over-year. Within services, support revenues are up 14% to $8.4 million. Support includes software maintenance and extended warranties. The professional services portion of services revenue was flat to the prior year quarter at $2.1 million based predominantly on a combination of the year-over-year modest revenue growth, the higher percentage of large new contracts for which services flow over longer time periods and our efforts to streamline customer implementation costs. We continue to see very strong customer loyalty as evidenced by 98% maintenance contract renewal rate.

As I switch to margins and other income statement line items, please remember that I’m going to focus on non-GAAP figures, which I’ve been adjusted for stock-based compensation and amortization of the acquired intangibles. I believe these non-GAAP numbers are more representative of the actual performance of the business. Our press release includes a reconciliation to reported GAAP numbers.

For the first quarter, gross margin was 61.8% versus 62.6% in the year-ago quarter. Product gross margin with 66% compared to 65.6% a year-ago with software margin up a 120 basis points from the year-ago quarter and device margin was down 240 basis points.

The software margins were within normal quarterly variations for contract terms. Overall, device margins were affected by higher warranty expenses and lower overhead absorption. As I noted on the Q4 call, we have experienced some higher warranty costs in previously raised warranty reserves related to the B3000 badges.

I wanted to highlight that while warranty expenses increased this quarter year-over-year, they actually decreased sequentially from Q4. Please also note that warranty costs for the B3000 are still running below our experience with the B2000. Services margin decreased 230 basis points year-over-year. This was driven by slightly higher warranty costs related to our extended warranty revenue streaming and increased costs to support the growth and customer deployments and technical support.

As I said before, the Company’s business model provides significant financial levers asset growth, while we remain confident in our ability to achieve our long range gross margin target of 70%. Looking at operating expenses, total OpEx was 76.2% of revenue, up $3.2 million year-over-year as we maintained our commitment to invest in new products and enhancement and enabling sales growth by investing itself in marketing.

We continue our bias of investing to power future growth and the long-term success of our customers and our business. R&D was up $0.4 million or 13% year-over-year, which is somewhat lower growth rate than we expect with the full-year, primarily due to the timing of project spend and our ramp of engineering headcount.

Sales and marketing expenses increased $2.1 million year-over-year, as we expanded the sales and marketing efforts. The sales and marketing expenses were up 3% from Q4, primarily from planned staff additions and expanded marketing activities.

General and administrative expenses in Q1 were up $0.7 million year-over-year, driven by higher employee related costs, audit, legal and other costs related to the mVisum acquisition. Q1 adjusted EBITDA loss was $3 million, a little better than our guidance range.

Non-GAAP net loss for the quarter was $3.6 million or a loss of $0.14 per share. GAAP net loss from the quarter was $6.4 million or a loss of $0.26 per share. Our non-GAAP net loss excludes $2.6 million of stock-based compensation costs and $0.2 million of intangible amortization.

Turning to the balance sheet, our cash, cash equivalents and short-term investments at March 31, were $122 million, decreasing $6 million from year-end primarily due to the acquisition of mVisum which accounted for $3.5 million and seasonally lower accounts receivable collections.

Next, I would like to cover our guidance. As was true last quarter, our guidance includes a cautious view of hospital offering budgets and spending especially in the first half of the year. Our guides also reflects a continued bias to investment in the business to power future growth as well as our confidence in the long-term growth that we can achieve.

Brent shared with you a number of the factors that demonstrate our confidence in the market opportunity that we’re uniquely capable to fill. The full-year 2014 our guidance remains unchanged while bookings got off to a slow start for our U.S healthcare business in Q1 or bookings quarter to date for Q2 are up substantially versus the prior year which is a positive sign.

New business pipelines are robust and growing and customer interest in the new products launched at the end of February is making its way into our pipeline. As a result we iterate our revenue guidance of between a $105 million and $115 million. Non-GAAP EPS between a loss of $0.10 and $0.28, and adjusted EBITDA between a loss of $4.5 million and breakeven.

We expect GAAP EPS to be between a loss of $0.73 and $0.89. Our full-year 2014 non-GAAP guidance excludes stock-based compensation expense ranging from $13 million to $14 million, intangible amortization of approximately $0.8 million and legal costs related to the pending securities litigation.

Non-GAAP earnings per share guidance is based on a fully diluted share count for the full-year 2014 of $25.5 million. Income tax for the year is expected to be between $200,000 and $300,000. For the second quarter 2014, we expect revenue between $24 million and $25 million. Non-GAAP EPS between a loss of $0.11 and $0.14 and adjusted EBITDA between a loss of $2.2 and $2.9 million.

We anticipate GAAP EPS to be between a loss of $0.24 and $0.27. While Q2 guidance implies a revenue ramp in the second half of the year this pattern is consistent with historical trends in which we typically see growing strength in our business as we move through the year. At the midpoint of our guidance range for the year this implies 55% of our revenue will occur in the second half which is consistent with what we saw in 2013 with 54% of our revenue occurring in the second half.

Our second quarter 2014 non-GAAP guidance exclude stock-based compensation expense of approximately $3.2 million and intangible amortization of approximately $200,000. Non-GAAP earnings-per-share guidance is based on a fully diluted share count for the quarter of $25.4 million. We do not expect material income tax expense for the quarter.

In summary, we expected a challenging first quarter and we guided accordingly and ran the business appropriately. During the second quarter thus far we’ve seen tangible evidence that spending patterns were beginning to improve and we remain optimistic about the full-year.

That concludes my portion of the call and with that I’ll turn it back over to Brent for some closing remarks.

Brent D. Lang

Thanks, Bill. Before we get to Q&A, I want to announce an upcoming event for those of you who couldn’t get the hints, we’re going to be having a half day investor demo session of the Vocera Collaboration Suite and the Vocera Care Experience products as well as the Alarm Management Solution on the morning of Tuesday, May 13th. This morning session will help you gain a better understanding of the value Vocera provides and will give you a clear view of our competitive differentiation. Be on the look out for an email from Brad Samson with the details or send him a note if you want to log in for the event.

Finally, I want to take this opportunity to thank all of our Vocera employees who worked tirelessly to develop and deliver best in class solutions and our customers who are working hard to serve the needs of their staff, patients, and customers. Thanks for the time today. We’re ready to open it up for questions. Operator, please proceed.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ryan Daniels with William Blair. Please proceed.

Ryan Daniels - William Blair & Company

Hi, guys, thanks for taking the questions. I think probably the most popular topic tonight will be on the bookings weakness in the first quarter. Can you give us a little bit more color on, either how much that was down year-over-year or maybe how far away from your target that was during the fourth quarter?

William Zerella

Hi, Ryan. It's Bill. So, yes -- I mean, we don’t, as you know get into that level of fidelity in terms of bookings, I mean we continue to just provide color and that’s what we intended to do. So, obviously it didn’t hit our internal targets, so it was a weak start to the year. But as we guess, Q1 was, we’re seeing as we indicated a really strong start to Q2. So, whether some of those purchases potentially got delayed or not it's kind of hard to tell. There were some deals at the end of the quarter that were moving along and did slow down and those closed pretty quickly in Q2. So, we’re kind of looking at it on balance with what we’re seeing in terms of Q2 out of the gate.

Ryan Daniels - William Blair & Company

And are you hearing any feedback from your sales force, I know you didn’t make direct comments on this, but just with us getting past the anniversary of the sequester cuts you’ve got, it looks like in short coverage ramping up you’ve got the ICD-10 delay, it seems like there’s some factors maybe in your favor. Is that manifesting at all in the pipeline when you talk to your sales teams?

Brent D. Lang

Hi, Ryan this is Brent. Our sales force is really quite bullish on their pipeline, and I think it's a function of some of the factors you just talked about maybe budget clarity coming through. The ICD-10 thing we’re not sure which way that is going to end up playing out, but I think the sales force is feeling increasing confidence coming into this quarter with improving pipeline and better velocity on deals.

Ryan Daniels - William Blair & Company

Okay. And then a couple of more, and I’ll hop off. Just the Q2 revenue guidance if we look at that and look at the EBITDA guidance, it looks like you’re expecting better profitability or margins in the quarter. Is there anything particular there despite a potentially lower revenue base that will allow that?

Brent D. Lang

Yes, so I think the best way for you guys to look at this is, we expect gross margins to increase marginally. OpEx potentially flat to actually slightly down, again just due to some of the timing of spending. G&A was bumped up in Q1 due to some of the additional costs that I mentioned, especially the mVisum acquisition which we didn’t breakout, and obviously those costs won't pull through again in Q2. So, we’re going to see a little better OpEx leverage potentially in Q2 as well. So it's the combination of those two factors, Ryan.

Ryan Daniels - William Blair & Company

Okay. And then last one, I’ll get off. In Care Experience I know that was launched kind of to the full sales force, at the start of the year along with the move to the broader lets say a Collaboration Suite. And I am curious if you think that has caused any distractions in the sales force having a bigger menu of solutions, having to focus on different things, understand different product offerings. Does that muddied the sales message at all or has that been pretty smooth?

Brent D. Lang

I think it's been pretty smooth. As I mentioned the sale operations team has been doing a really nice job of putting together training materials and sales tools to help the teams with that. Clearly there’s a learning curve for those guys to go up but we were not hearing from the sales force that, that was the source of distraction. It was really more the market dynamics that was delaying some of the, bookings in the quarter.

Ryan Daniels - William Blair & Company

Okay, perfect. Thanks guys.

Operator

Your next question comes from the line of Mohan Naidu with Stephens. Please proceed.

Mohan Naidu - Stephens Inc.

Hi, thank you for taking my question guys. Brent, Bill, just on the bookings again, what has changed within Q1 and Q2? You’re talking about substantial uptick in Q2 bookings so far other than the delayed deals that’s closing in Q2. Are you seeing any changes in the market?

Brent D. Lang

Well I think what's happened, and this is somewhat speculation on my side, but I think in many cases the dialogue we’re having with hospitals was that during Q1, they were in somewhat of a wait and see mode. They wanted to see what the patient populations were going to look like. They wanted to see what the registration’s within the exchange is going to look like. Several of the larger customers we talked to said that they were trying to avoid large expenditures particularly capital expenditures in Q1, because if they get too far out ahead of themselves in the Q1 timeframe, it's very difficult for them to catch up with the rest of their operating plan throughout the rest of the year. And so we heard pretty consistently from folks that they were just talking a very cautious perspective kind of waiting to see what happened and then I think what we started to see through the end of the exchange signups and then when patient population data for the quarter came through some of that positive sentiment came out and they realized that things were maybe better than they had feared, and that maybe resulting in some of the acceleration in bookings coming into this quarter. Now I’ll highlight, we’re still relatively early into Q2, so I don’t want to be extrapolating to where we’re going to end up at the end of the quarter, but I think Bill is exactly right that, if you look at it on a year-over-year basis we had substantially higher bookings in the month of April than we did last year in the month of April. And I think I can point that to an encouraging sentiment in the market place in general. I mean the economy is improving, and I think the hospital patient populations are improving and generally the feelings amongst the decision makers are improving. And unlike last year, there were several deals that slipped out of Q1 last year if you remember. It took us quite a bit of time to close those deals. Many of them were closed over subsequent quarters as opposed to subsequent days and weeks. And so I think that’s giving us a little bit more confidence that we’re seeing a bit of a trend there. But we are still remaining very cautious and providing pretty cautious guidance for Q2 because it's just really too early to know how this is going to eventually play out for the full quarter.

Mohan Naidu - Stephens Inc.

Got you. And in the strength in Q2 so far, are you seeing any particular strength in like new or existing customer expansions. I know you talked about weakness in the existing expansions.

William Zerella

Yes. Hi, Mohan, it’s Bill. Yes, actually what's interesting out of the gate here is we’re actually seeing a lot of stress in the existing customer base, which is more positive trend than we’ve seen obviously in quite some time. So, as we mentioned it's still early, we’re only one month in, but that’s an encouraging sign since that’s one of the biggest levers for us obviously in terms of our overall growth.

Mohan Naidu - Stephens Inc.

Okay. And one last question in this bookings topic here, if the market conditions remain the same as you saw in Q1, are you still comfortable with the guidance that you have right now for the full-year?

William Zerella

Yes, I guess that’s why I would describe it Mohan is we’re -- and as Brent said, we’re still taking a pretty cautious view here. We’re not extrapolating the experience that we’re seeing so far in April through the end of the quarter that would make sense I mean it's too soon for us to be able to justify doing that. So we’re taking a pretty cautious view recognizing that we’re only one-third in. So, it's difficult for us to extrapolate it, that’s the best thing I could say. So, we’re going to be cautious.

Mohan Naidu - Stephens Inc.

Okay. Now one last question, and Brent on the international it looks like a contrasting profile to the domestic market, is the international market being driven by new hospital construction, is that where you’re seeing a lot of strength or it's just in general there is a lot of pick up there?

Brent D. Lang

In general we’re seeing a pick up internationally. We always do well in new construction environments because it's an opportunity to go in and think about improving processes and installing voice grade wireless infrastructure and really trying to get to best in class many organizations where it's domestic or international, look at that new construction as an opportunity to reset and kind of upgrade to best in class and we do very well there. I also think just the budget environment in some of those other regions are more positive particularly in the Middle East and Asia Pac where we’re seeing strong levels of investments and a strong desire to move to sort of best in class communication solution.

Mohan Naidu - Stephens Inc.

Okay. And the majority of the strength is in English speaking products, not in any other languages.

Brent D. Lang

That’s correct. That’s exactly right.

Mohan Naidu - Stephens Inc.

Thank you very much.

Brent D. Lang

Thank you.

Operator

Your next question comes from the line of Gavin Weiss with JPMorgan. Please proceed.

Gavin Weiss - JPMorgan

Hi, I might have missed this in the commentary, but in terms of the guidance for 2Q, I know you’re trying to be conservative and I understand the percent waiting for back half versus the front half of the year, but why are you not projecting a typical sequential uptick from the first quarter?

William Zerella

Hi, Gavin its Bill. So, the way we calculate our guidance is we look at the backlog coming into the quarter plus obviously our projections for our supplies business, our maintenance business and then a roll up of the forecast from the field in terms of what would be book ship okay. So, the math kind of gets us to that place and our field is being pretty conservative as well in terms of their forecast roll up. So we apply a pretty disciplined process here and we look to the field to give us that feedback and input as to what they’re committing to and that’s just our approach, right? So, again if we took the trend out of the gate for the month of April would result in a different number but yes we’re going to look to our field sales organization to give us their commitments and base our guidance on that. So, that’s where we land when we go through that exercise.

Brent D. Lang

The thing I would just add to that, there are a number of upside deals that we monitor. And right now we’re just tending to be more conservative and putting most of those upside deals into the second half of the year. There’s a probability that some of those end up getting pulled into Q2. But for now based on what we’re seeing with the extended decision making timeframes we’ve left the mass majority of the upside deals into the second half.

Gavin Weiss - JPMorgan

Okay. And then Brent, you mentioned you had to deal with an ambulatory center in Wisconsin, was that a customer that approached you or is your sales team now sort of expanding outside of the hospital and targeting alternate sites?

Brent D. Lang

So we’re leveraging our existing install base customer relationships, and in many cases the hospitals have got relationships with the ambulatory centers, whether it’ll be surgery centers or outpatient clinics, and they’re looking to expand to those environments. We have not done a lot of proactive selling into those markets at this point although as I referenced in my comments, I do think it represents an interesting growth opportunity for us at some point in the future. But for now it's been them reaching out to us knowing the value of the solution within the inpatient environment and doing the extrapolation on their own to see the value it could create in the outpatient.

Gavin Weiss - JPMorgan

Okay, great. Thank you very much.

Brent D. Lang

Thank you.

Operator

Your next question comes from the line of Matt Hewitt with Craig-Hallum. Please proceed.

Brent D. Lang

Matt?

Operator

He has dropped from the queue. Our next question comes from the line of David Larsen with Leerink Partners. Please proceed.

David Larsen - Leerink Swann

Hi, can you please talk about the investments that you have made into sales operations and how that has progressed through the quarter and any results you’re seeing from that? Thanks.

Brent D. Lang

Yes, sure David I’d be happy to talk to that. First was I think getting the team in place and this has been a major focus for Paul since he came onboard and did an evaluation of where our strengths and weaknesses were that we needed to do a better job of empowering the sales force in order to drive better productivity. So the focus has been around a couple of different areas. First, some tools to help customers do the internal selling that’s required to navigate these approval processes inside to ROI calculators, things that actually help to derive the benefits and communicate the benefits within the organization. The second area has been around sales training and account planning training. And we’ve actually been doing a number of web-based training for the sales force to teach them about the new products and teach them the sales methodology that we’re rolling out within the organization. The third area has been taking a look at our forecasting methodology and trying to be a little bit more rigorous and disciplined in the approach we take. Paul, I think had some great experiences from his prior employers were able to bring in, and he’s bringing in a level of discipline into the organization that will help us drive greater levels of -- forecast accuracy. And then I think the final thing I would point to is the work we’re doing around the brand presence. And as you and others saw, with the launch we did at HIMSS, we’ve launched the new brand Look and Feel but also the new brand meaning and the brand culture associated with that, that’s actually generating a lot of dialogue with customers who will notice the new branding and then it will start a dialogue to say, well what does this new brand really represent? It's gives us an opportunity to step back and talk to them about the Vocera software platform, the device agnostic nature of our solutions, some of the new solutions that we brought into the market place and kind of expand the thinking beyond Vocera just being a badge company to being a provider of solutions for a range of different issues that they’re facing. And while a new logo may seem like a superficial thing at some level, it generates a lot of really interesting conversations with customers which ultimately allows us to understand their needs and then apply our solutions to solve those problems.

David Larsen - Leerink Swann

That’s great. And then with the sales force, has there been a high level of retention or could you just comment on turnover I mean, about 68 have they all been there, has there been any turnover?

Brent D. Lang

We always have some natural turnover where we cycle through some of the poor performers. We have had very little involuntary turnover, it's been mostly -- I’m sorry, we’ve had very little voluntary turnover, it's been mostly decisions that we made in order to upgrade the team or people who were not in the right job or not performing at the levels we’re hoping for. But I would say the sales turnover in Q1 was pretty low. I don’t have the numbers in front of me, but just sort of thinking through the ads and changes we had, it was I think pretty low in the quarter.

David Larsen - Leerink Swann

Okay. Thanks a lot.

Brent D. Lang

Thank you.

Operator

Our next question comes from the line of Sean Wieland with Piper Jaffray. Please proceed.

Sean Wieland - Piper Jaffray

Hi, thanks. A tangent on the bookings line of questioning. Tell me how the comments on the Q1 bookings correlate with the deferred revenue on the balance sheet which actually seemed to grow pretty nicely this quarter?

Brent D. Lang

Hi, Sean, so it actually declined sequentially slightly from Q4.

Sean Wieland - Piper Jaffray

Yeah, thinking year-over-year it grew about 17%. I think year-over-year.

Brent D. Lang

Yes, year-over-year it was up like 18.5%. So, I mean as you know a lot of deferred revenue relates to maintenance which flows over the course of the year. So that’s kind of just a natural build as we add customers. And since our renewal rates are so high, our deferred revenues just typically continue to move upward as we grow the business and grow the install base. So, that’s really what's driving that piece. I mean in terms of quarter-to-quarter revenue it's -- variability is more driven by products, bookings and product shipments, because that’s the biggest variable. The other piece also that’s sitting in deferred revenues you know is our subscription business which is still small but it's growing and that materializes over multiple quarters sometimes even over a couple of years. So, does that answer your question?

Sean Wieland - Piper Jaffray

Yes, I think so. So, within the bookings in the first quarter, can you call out any products that maybe were notably behind your expectations, and specifically how did the new care experience in collaborations suite there?

Brent D. Lang

Yes, so with the two new products because they were only launched really in the last month of the quarter. They didn’t contribute meaningfully to overall bookings in the quarter. We have seen nice pipeline growth there, but the decision making cycle, sales cycle for those products is going to be more than the few weeks that they were in the market place before the quarter ended. So, the big driver of bookings for the quarter is within our core product line. And it was as Bill mentioned he was really focused predominantly on U.S. Healthcare. The international piece grew nicely but we did see softness both within new customers as well as within existing customers within the quarter. The new customer as I mentioned is typically soft in Q1 just based on the fiscal year end, a lot of times driving more new customer acquisition in Q4, but we saw softness across both those categories relative to our initial expectations. That’s one of the reasons why we don’t tend to dwell a lot on bookings although we are in this Q&A is because bookings tends to be lumpy, and if you sort of take the month-to-month variation of bookings and sort of spread that our more evenly over a longer period of time that ends up getting reflected on our revenue growth. So, I think the strength we’re seeing so far in Q2 is somewhat of a balancing effect of some of the weakness that we saw in Q1.

Sean Wieland - Piper Jaffray

All right, got it. And then with regard to the B3000 badges, what are specifically some of the issues that you’re seeing that’s causing you to take your warranty reserves up?

William Zerella

Hi, Sean the issues, at any point in time there’s always various things that we’re addressing with the badge. What we’re seeing predominantly that, that’s driving the warranty reserves are cosmetic issues. So the badges are still functional and operating, but there’s some cosmetic issues that we’re working to improve on, and we’re always in this continuous improvement mode. So there’s been a bump up in the returns as a result of those issues and we’re working through that. But that’s predominantly what's going on and that’s what's driving the charges that we’ve seen in the last couple of quarters.

Sean Wieland - Piper Jaffray

All right, that’s great. Thank you.

William Zerella

Okay.

Brent D. Lang

Thank you.

Operator

Your next question comes from the line of Jamie Stockton with Wells Fargo. Please proceed.

Jamie Stockton - Wells Fargo

Yes, good evening, thanks for taking my questions. I guess maybe the first one; I wanted to focus on the government business. It seemed like it picked up from a bookings standpoint in the second half of last year and I was curious if you guys have seen those stronger bookings started to flow through the income statement yet?

William Zerella

Yes, hi Jamie. So, we did see some revenue in Q1 that related to backlog that existed -- when we exited 2013 related to government deals. There still are deals in backlog and again they kind of meter out the penny upon the deployment schedule of each facility. So, I don’t have the numbers exactly in front of me in terms of how much float into revenue versus the sitting in backlog, but certainly there was some deals that did flow through and other deals that are still out there and we’ll hit revenue in future periods.

Jamie Stockton - Wells Fargo

Okay. And then maybe just one more on the government front. You mentioned the B3000 is now certified, I guess maybe this is another backlog question, but it also I think would apply to new deals. Are you seeing any hospitals that had made orders before for B2000, say oh, well now that 3000 is certified we’re going to switch to that, and did that delay anything? And then now that 3000 is certified, having seen any improvement in the pace of conversations with some of the government hospitals?

Brent D. Lang

So, it really didn’t increase any change in the ordering patterns. We have been in communication with them that this was work in progress. So, there wasn’t a lot of stalling out in terms of orders changing from one to the other. I think that, in general they’re excited about the new product. They have been interested in it and they’re little pleased with the performance that they’ve seen from it. So in many cases they were happy about it. I think the dialogue to answer your broader question, the dialogue with the VA facilities has continued to be positive. As you guys know the actual spending from the federal government tends to be pretty lumpy into the Q3 timeframe. So, we didn’t have a whole lot of bookings from the federal government in Q1 because that’s just not a timeframe. But I think the significance of getting this certification early enough that they can get it into their budget cycles and can get it into their purchase plans for the future. If we had, had this delayed say till the middle of the summer or missed the Q3 window then that would have presented a problem for them, but the timing that we were able to achieve allows them to continue on with the plans that they have.

Jamie Stockton - Wells Fargo

Okay, that’s great. And then I think that you mentioned that you’ve got two pilots going with two relatively large hospital chains. Are those brand new customers across all the facilities potentially or are those customers that you already had, one or two facilities -- I am sorry hospitalities?

Brent D. Lang

Yes, they were hotel chains for sure. Yes, I do make the same mistake all the time mixing them up. These are new chains, they are very large international chains and they represent new customers for us that we’re working with at the corporate level and they are evaluating it for a broader roll out within the system.

Jamie Stockton - Wells Fargo

Okay. And then just my last question, you have done a lot of re-branding, it seems like you’re elevating kind of the app model a little more. Can you talk about maybe not with the collaborations suite but just generally with the more traditional solutions the flow of deals that have included more app licenses maybe even if it's just physician focused, is that emerging as more of a model or maybe sell apps and badges and more deals?

Brent D. Lang

They’re certainly becoming a bigger part of the conversation. It hasn’t translated to becoming a huge percentage of revenues at this point, but more and more of the conversations are including that as one of the options. Particularly in the non-healthcare piece actually we’re seeing strong interest in the smartphone solutions in the non-healthcare markets. But also in the healthcare markets we’re seeing a mix of used cases in the dialogue as they start to scope out projects for the future.

Jamie Stockton - Wells Fargo

Thank you.

Brent D. Lang

Thank you.

Operator

Your next question comes from the line of Gene Mannheimer with Riley. Please proceed.

Gene Mannheimer - B. Riley & Co.

Hi, thanks, good afternoon. You mentioned that quarter to date bookings were up substantially. Can you help us out a little bit, does that mean 20% higher, 50% double. How can I get my arms around that? Thanks.

Brent D. Lang

Bill do you want to take that one?

William Zerella

Yes. Yes, Gene I mean again we really don’t get to that level of fidelity. But the only color I can give us is that, the percentage year-on-year growth that we’re seeing so far in April is higher than the percentage decline we saw in Q1 for the whole quarter in terms of percentages. Now, again whether that kind of continues at that rate, it's kind of hard to say, but it is substantial, but it's only one month into the quarter. So, that’s why, as you can tell from our guidance we’re not necessarily factoring that in based on the fact that we want to be conservative and our field sales organization is also being somewhat conservative in our view in terms of their commits and their forecast to us. So, I think that’s about as much as I can say and I really don’t want anybody to read more into this than there should be. I mean we’re trying to provide as much color as we can, looking at the trends.

Gene Mannheimer - B. Riley & Co.

Understood. So, did I hear you say earlier that some of the weakness in Q1 may have reversed itself and that could be what you’re seeing in the strength in Q2?

Brent D. Lang

Yes, absolutely. I think what we saw was that, some of the deals that we expected initially to close in Q1 have now been closed in the early part of Q2 and deals -- we talked about this in the calls in the past, there’s always deals that are moving from one quarter to the other and we really try to avoid getting into this game of using an excuse as to a deal slipping from one quarter to the other. In this case I think what we’ve seen is that not only did they slip but they slipped and then they closed, and that’s what's provided some of the strength so far quarter to date in Q2. But beyond even the deals that we were tracking from Q1, I think just the market sentiment has changed a little bit, the dialogue has changed a little bit and the tone of the conversation with the customer has changed a little bit. I think Bill and I are just saying that, given the fact that most of our quarters are backend loaded anyway one more into the quarter it's pretty hard to make an extrapolation of where we’re going to end up for the quarter overall. So, we’re going to maintain conservative outlook. But it does feel like the sales force is more excited about their prospects for this quarter than where they were last year or last quarter.

Gene Mannheimer - B. Riley & Co.

Okay, great, that’s good to hear. And then my only other question is, regarding mVisum, I know it's small but does your guidance contemplate any expected impact or contribution from mVisum even in the fourth quarter, and will everybody be selling that product? Thanks.

Brent D. Lang

Yes, so the guidance that we initially provided had just a very, very small amount of revenue associated with mVisum towards the end of the year, not a meaningful piece at all. And to answer the second part of your question, with part of the roll out that we’ll be doing to you’re the entire sales force will have access to the product, they will be allowed to sell the product and we’re going to be training the entire sales force. We’ll also have some specialists focus on providing more technical details to assist the sales force that’s at managing the customer relationship. So, yes we will be rolled out, well I guess I should say within the U.S. initially the product would be a U.S. only product.

Gene Mannheimer - B. Riley & Co.

Good stuff. Thank you.

Operator

Your next question comes from the line of Matt Hewitt with Craig-Hallum. Please proceed.

Dillon Hoover - Craig-Hallum Capital Group

Hi, good afternoon guys, this is actually Dillon on for Matt, I apologize I got disconnected right when it was my time to ask the question, so I apologize if I missed this. But regarding the sales force execution for the quarter, you guys had provided some color that it was good. I know on previous calls you had stated that it was 30% kind of quarterly run rate for productivity; can we still assume that moving forward?

Brent D. Lang

Yes, what we’ve said in the past is that as we hired new sales people we use a model that in each quarter to go from 30% productivity to 60%, to 90% and within a year we expect them to be at full productivity. We believe that, that model it will be at least that good and if not better with the new sales enablement tools that we’re putting in place and the focus on training and enablement where they putting into place. Frankly now the bigger mover on this is just the reduction in the overall churn. And I think the statistics that I pointed to in the script that the 53 out of 64 have been here at least a year means that the vast majority of the sales force has already gone through that cycle. And so while the sales enablement activities that we’re doing in terms of sales tools and sales training is going to help everybody, it's less of a concern because we’re not bringing in the same rate of new reps that are having to start from ground zero.

Dillon Hoover - Craig-Hallum Capital Group

Okay. So, on that note, are you guys looking to expand to possibly 70 existing the year or how many you’re looking to hire from here until the end of the year?

Brent D. Lang

I think we’re going to wait and see how the rest of the year, the rest of the quarter and the next couple of quarters plays before we finalize our plans for sales growth moving forward. Based on what we’re seeing in some of the international markets I think you’ll continue to see us growing the sales force internationally. There’s just a tremendous opportunity there and good geographies to go after there. The U.S. sales force, we’re felling pretty good about the coverage model there. We’ve got the [ph] [hunters and farmers] with the folks selling to the install base and folks focused on the new customer opportunities. We have got pretty good coverage models and each of those reps has done a good job of building relationships with their group of customers. So we don’t want to disrupt that. What we may see more of particularly as we add new products to the overall offering and with some of the acquisitions coming in is brining in more of a model of specialists so that the individual account reps calling on the install base and the reps calling on the define territories for the new customers will stay pretty constant, but you will see more folks who are brought in as specialists to help with the sale of some of the newer products.

Dillon Hoover - Craig-Hallum Capital Group

Okay. And then, last one for me, on the M&A front mVisum was your last acquisition, it was relatively small yet important, but are there any pieces of the value chain that you guys are missing or looking to add or you’re pretty content with what you have?

Brent D. Lang

No, we’re definitely looking at adding. We’ve had some really interesting conversations internally and even at the board level about some of the new green space environments that we want to go after and we’re pursing some M&A activity along a couple of different fronts there that, you’ll just have to stay tuned to learn about.

Dillon Hoover - Craig-Hallum Capital Group

Thanks for the color.

Operator

(Operator Instructions) Your next question comes from the line of Eric Coldwell of Robert W. Baird. Please proceed.

Eric Coldwell - Robert W. Baird & Co.

Thanks and good evening. I apologize, my phone cut out right in the middle of one of your comments, so I might have to make you backtrack on something. Regarding the expansion deals, I heard you say that they were down year-over-year, but then it sounded like and then it cut out -- but then it sounded like in future messaging you said that voice communication and software licenses, it sounded like those were up and also maybe some customer site expansions. So, I just want to make sure I really understand exactly what you’re saying on the overall expansion deal market place in the context of maybe down year-over-year, but it sounded like there was some activity picking up. And then I have one follow-up.

William Zerella

Hi, Eric its Bill. So, yes overall expansions were down year-on-year in Q1 in terms of bookings but we did see -- all the expansions we did get in the quarter we did see some nice expansions from the install base for either existing facilities or new facilities within an existing customer that dragged along with it a fair amount of software. Okay, so that was a positive trend. And then I don’t know if you heard the comment, in terms of out of the gate so far in April we’re seeing strength in the install base as well. So, that’s what we’re kind of seeing. So, there was weakness in Q1 although some strength in software and then now we’re seeing some strength out of the gate in Q2.

Eric Coldwell - Robert W. Baird & Co.

Got it, that’s perfect. And then my follow-up, I think you made a comment on average ASP was down a little, if I have not mistaken and I guess the question is, is it simply because of some of these delayed timings that happened in Q2 that might have been bigger or is part of that perhaps related to your growth with mobility international new solutions, perhaps a bit of a mix shift. I just want to make sure I understand the comments on ASP being down just a little.

William Zerella

Yes, so first it's average deal size, which is obviously different concept in ASP. And average deal size is a function of simply the mix of different size deals that we do whether it's hospitals or smaller hospitals versus larger hospitals and yes some of the non-healthcare stuff affects it as well. However healthcare still dominates the, it's a dominate impact in terms of average deal size. So we just saw a mix that resulted in smaller -- somewhat smaller average deal sizes for the quarter, but there have been flows every quarter.

Eric Coldwell - Robert W. Baird & Co.

Got it. You’re not really calling --

William Zerella

Now, we’re really calling so much into that.

Eric Coldwell - Robert W. Baird & Co.

Okay, good. You’re not calling out a trend or anything?

William Zerella

No.

Eric Coldwell - Robert W. Baird & Co.

Okay, perfect. Thanks very much.

William Zerella

Okay.

Brent D. Lang

Thank you.

Operator

There are no further questions in queue at this time.

Brent D. Lang

Thanks for your time today. I appreciate it, and we look forward to following up individually with you in the future. Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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